VCTs Lure Savers With Maxed Out Pension Tax Breaks

An increase in the number venture capital trust (VCT) investors is probably because they are looking elsewhere for tax breaks after maxing out their pension savings.

HM Revenue & Customs suggests this is the most likely explanation for a VCT bonanza that saw the number of investors claiming income tax and capital gains tax (CGT) reliefs jump 24% in a year.

The latest VCT statistics reveal 18,890 VCT investors claimed income tax relief in 2017-2018.

These investors claimed income tax relief on £670 million of investment in 2017-2018, compared with £503 million in 2016-2017, an increase of a third.

“The upward trend is likely due to the continuing impact of the pension changes, such as the reduction of the lifetime allowance and new pension freedoms, as well as anticipation of changes from the Patient Capital Review,” said the HMRC report.

Pension taper rules

Although tax breaks and the number of investors increased, the number of VCTs managing funds was down from 68 in 2017-2018 to 62 in 2018-2019, mainly due to liquidation and mergers of some funds.

The number of VCTs raising funds dropped slightly, from 43 in 2017-2018 to 42 in 2018-2019.

Another factor encouraging VCT rather than pension investment are taper rules that cut the amount a taxpayer earning more than £150,000 a year can save into a pension annually.

Ordinary savers earning less than £150,000 a year can expect tax relief on an annual £40,000 pension contribution allowance, but this can taper to £10,000 for higher earners.

Lifetime allowance cap

The lifetime allowance also caps savings at £1.055 million, although the allowance will rise with inflation each year.

Wealthy savers can divert cash that would otherwise go into a pension to gain VCT or Seed Enterprise Investment Scheme (SEIS) tax breaks.

SEIS offer 50% income tax refunds on investments of up to £100,000 in a tax year, CGT-free growth on share values and loss relief should an investment in a new start company fall flat on a three-year investment.

VCTs come with a 30% income tax refund on an investment of £200,000 each year, CGT growth and tax-free dividends for a five-year tie up.

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